Construction Loan Rates: The Costs Of Financing Construction

Building a property from the beginning may sound tempting to most people because it provides you with the opportunity to design your own home. It also gives you the opportunity to posses your own property without paying high amounts. However, financing the construction of a property by means of a construction loan is not for free and the interest rates on these loans are not identical to the rates charged on mortgage loans.Why Is The Rate So Important?Just like with mortgage loans, since construction loans deal with high loan amounts, the interest rate is extremely important. The rate applied to the loan amount along the loan’s repayment program will give you the overall cost of the loan. That figure can tell you exactly how much more money you are spending on the property and how much money you would be saving if you had the funds to pay it off without resorting to a loan or line of credit.Therefore, when shopping for this type of loan, though the rest of the loan terms are important too, you should focus on the APR if you want to compare costs to decide which lender and loan best suit your needs and budget. The APR will provide you with a thorough idea of the costs of the loan including any additional fees or charges to the interest rate.A Greater Risk, A Higher RateCompared to mortgage loans, construction loans imply a higher risk. The reason is fairly simple: since the property guaranteeing the loan is not yet finished, its value is not enough to provide security to the loan. Therefore, the lender has to cover the risk of default and non conclusion of the construction project by charging a higher interest rate.However, truth is that the property will advance along time till it is fully finished. That is why most lenders offer a descending interest rate that varies as the property’s percentage of construction increases. Moreover, once the property is completed, the loan can be converted into a regular home mortgage loan with more advantageous terms and a longer repayment schedule (construction loans need to be repaid in a year or two depending on the magnitude of the project).Credit Score, Repayment Capacity and External FactorsThere are mainly two variables that affect the loan’s interest rate and are connected with the borrower: Credit score and repayment capacity (income). There are also external factors like the market situation, reference rates, major political events, etc. that can also affect the interest rate charged on construction loans. However, the most important variables and the only ones relatively under your control are your credit score and income.As usual a lower credit score implies a higher rate. There are also higher difficulties in terms of approval for those with bad credit, especially if they cannot provide a down payment or co-signer to aid the approval process. But, as with any other financial product, you should shop around for a lender and ask for loan quotes to compare what the different financial institutions have to offer you. It is the only way to get a good deal and you can do so, even if you have bad credit.